IRS Suggests Two Ways for Determining Loan Amounts Available to Participants

In a memorandum
to Employee Plans (EP) examination employees, the Internal Revenue
Service (IRS) has clarified there are two ways an employer can determine
the highest outstanding loan balance in the past year when calculating
the amount of an additional loan a participant can take from her defined
contribution (DC) plan.

The IRS notes that in general, Internal
Revenue Code (IRC) § 72(p)(1) provides that a loan from a plan is a
distribution to the participant. IRC § 72(p)(2)(A) excepts a loan that
does not exceed the lesser of:

$50,000, reduced by any excess
of the highest outstanding balance of loans during the 1-year period
ending on the day before the date on which such loan was made, over the
outstanding balance of loans on the date on which such loan was made; or

the greater of half of the present value of the vested accrued benefit, or $10,000.

Under
IRC § 72(p)(2)(A)(i), if the initial loan is less than $50,000, the
participant generally may borrow another loan (if the plan allows)
within a year if the aggregate amount does not exceed $50,000. The
$50,000 is reduced by the highest outstanding balance of loans during
the one-year period ending the day before the second loan, in turn
reduced by the outstanding balance on the date of the second loan.

The
agency gives an example: A participant borrowed $30,000 in February
which was fully repaid in April, and $20,000 in May which was fully
repaid in July, before applying for a third loan in December. The plan
may determine that no further loan would be available, since $30,000 +
$20,000 = $50,000. Alternatively, the plan may identify “the highest
outstanding balance” as $30,000, and permit the third loan in the amount
of $20,000. This assumes that to meet other IRC § 72(p)(2)
requirements, the participant has a vested accrued benefit of more than
$100,000, and the loan is repayable in five years and requires
substantially level amortization.

“At this time, the law does
not clearly preclude either computation of the highest outstanding loan
balance in the above example,” the IRS says.